PSS World mostly breaks even on takeout news; Jarden trades down in line; AMD off lows

By Rebecca Melvin

New York, Oct. 25 - PSS World Medical Inc.'s convertibles mostly broke even on a dollar-neutral, or hedged, basis on Thursday after news that McKesson Corp. is buying the Jacksonville, Fla.-based medical products distributor for $1.46 billion in cash.

"PSSI did not work out well for guys on a hedged basis," a New York-based trader said, referring to the company by its stock ticker.

A second trader said, "It was a small loser, but not that bad."

A third trader said that it expanded slightly by 0.25 point to 0.5 point on 65% delta hedge.

Elsewhere, Jarden Corp.'s $500 million of 1.875% convertibles due 2018 dropped about in line with the underlying shares to trade below par after the Rye, N.Y.-based household-products company reported lower third-quarter profit that beat estimates and lower revenue that was in line with expectations.

Advanced Micro Devices Inc.'s 6% convertibles bounced off their lows Thursday to trade in a range of 93 to 93.75 amid no particular news from the Sunnyvale, Calif.-based chipmaker. The bonds have been sliding since last week when the company missed estimates and had traded down to 90.75 bid.

"They were better today," a New York-based trader said.

Navistar International Corp.'s convertibles looked a little worse for wear as the underlying shares of the Lisle, Ill-based truck and engine maker slipped below the per-share offering price of 10.7 million shares of common stock.

Terex Corp. was seen in trade at 158.55 versus an underlying share price of $21.50, a New York-based trader said, after Terex shares fell more than 4% on a strong earnings beat but missed revenues and lower guidance for full-year revenue by the Westport, Conn.-based maker of capital goods machinery products.

The convertibles of Cash America International Inc. were quiet, but the underlying shares of the pawnshop owner and operator jumped 6%.

There was not much market response to a new deal pricing after the market close. Quantum Corp. planned to price only $60 million of five-year convertibles, which were talked to yield 3% to 3.5% with an initial conversion premium of 30% to 35%, and was pricing via bookrunner Credit Suisse Securities (USA) LLC.

Traders said it was a small deal from a small company and perhaps not worth the effort of calculating a valuation given that it would probably end up in the hands of only about five or six investors.

Overall, the session was pretty quiet, traders said, with much of the volume concentrated in a few of the larger, better-credit issues.

Even with the market swing, traders said they didn't see much of anything of note. "Nothing came in too hard. Unless I had to invest, I wouldn't be long too many convertibles," a trader said, adding that it was disappointing that the PSS takeout didn't do better.

A New York-based trader said, "It's a slower market. There is not a lot to point to."

He added that investors are tending to wait and see, and that the convert market is "reasonably firm around the middle," with some of the tail risk slipping a bit. "The year hasn't been so bad."

PSS World mostly breaks even

PSS World's 3.125% convertibles due 2014 were seen rising to the 140s. Previously the paper, which wasn't typically active, stood at about 122 versus an underlying share price of $22.68, sources said.

Shares surged nearly $7.00, or 32%, to $28.57 in very heavy volume on news that it was being taken over.

The bonds have takeover protection for investors via a make-whole chart.

"On whatever neutral delta there was, it broke even," a trader said, noting that the deal doesn't close for a while and that hedged players will continue to play the name until the deal concludes.

On a neutral delta, which was 64%, "It didn't make any money," he said.

Market players, who held the bonds on a lower delta, made money, and those who held them on a higher delta, lost money.

On a 70% delta, holders lost about a point, a New York-based trader said, adding that there are rumors that there may be a competing bit from Cardinal Health Inc.

"Outright holders will sell to the hedged players, who will set them up against the stock," a trader said about the deal announced Thursday.

It allows purchaser McKesson to boost its scale and margins in its surgical devices supply business as medical procedure volumes fall.

The offer price of $29.00 per share in cash represented a 34% premium to PSS's stock close on Wednesday.

McKesson said it expects annual synergies of more than $100 million after four years.

Jarden drops in line

Jarden's 1.875% convertibles traded down to 99.25 bid, 99.75 offered versus an underlying share price of $49.00, one trader said.

The convertibles had traded at 100.5 versus an underlying share price of $50.50 early Thursday, and on Oct. 18, they traded at 104.25 versus an underlying share price of $55.20.

On their debut in the secondary market in mid-September, they closed 102.625 bid, 102.875 offered versus an underlying share price of $53.53.

Currently the paper is moving on a 55% to 60% delta.

"It looks like it nuked down in line with the delta, or slightly better. It's hard to say because there wasn't a significant amount of volume. But it didn't look too bad," a New York-based trader said.

A second trader said that outright players are going to become interested in Jarden below par. The paper has a 34% premium which is at the same level at which it priced, he said.

"If the stock comes in any more, we will see some outrights come in," he said, suggesting that the paper expanded about 0.25 point on a 60% delta, and that there were "better buyers" in the name.

A different New York-based trader said, "Like most new issues right now, these will move in line somewhat efficiently, unless the stock really moves."

Jarden reported net income of $77 million, or $1 per share, which was down from $91 million, or $1.03 per share, in the year-earlier quarter.

Excluding one-time earnings, earnings were $1.35 per share, up from $1.18 per share in the year-earlier quarter. Analysts expected that the company would make $1.30 per share.

Revenue was $1.7 billion, which was down 4%.

Mentioned in this article:

Advanced Micro Devices Inc. NYSE: AMD

Cash America International Inc. NYSE: CSH

Jarden Corp. NYSE: JAH

Navistar International Corp. NYSE: NAV

PSS World Medical Inc. Nasdaq: PSSI

Quantum Corp. NYSE: QTM

Terex Corp. NYSE: TEX

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